A recent Information Letter released from the Department of Treasury (Information Letter 2016-0077) provides a good reminder about understanding how an IRC Section 125 (cafeteria) plan, specifically a flexible medical spending account (FSA) plan, handles plan forfeitures. The question asked in this Letter relates to whether unused funds of a former plan participant of an FSA plan are required to be relinquished to the U. S. Treasury. The answer to this question is, “no”. Forfeitures in a cafeteria plan or FSA plan can only be used in the manner specifically provided for in the plan document, and cannot be returned to the participant on a dollar for dollar basis. Generally, the plan document will provide that forfeitures can be used to defray administrative costs, or to reduce future contributions, or both. Thus, it is important that the terms and conditions of the plan are followed, specifically as it relates to forfeitures of unused funds.
The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.
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